FX rigging: Barclays feels the heat

Barclays has suffered the biggest blow in the latest round of billion-dollar regulatory fines for rigging currency markets, with a penalty of almost $2.4 billion from five regulators, with the spotlight shifting to FX options.

UK and US regulators fined five banks $5.7 billion on
Wednesday, bringing total penalties so far to $9 billion.

Barclays was fined the biggest charge ever imposed by the
UK's Financial Conduct Authority of £284.4 million, for
failing to control business practices in its foreign exchange
business in London.

The FCA found that failings in Barclays' FX business
persisted, despite being investigated and fined for similar
control failings in relation to Libor and the gold fixing. The
bank was found to have not taken adequate steps to address the
underlying root cause of the failings in its FX business.

Antony Jenkins, chief executive officer at the bank, says:
"The misconduct at the core of these investigations is wholly
incompatible with Barclays' purpose and values and we deeply
regret that it occurred."

The main findings were that traders at the bank attempted to
manipulate the WM Reuters and European Central Bank fix,
triggered clients' stop-loss orders and inappropriately shared
confidential information internally and with third parties
about client orders.

This was done through tight-knit groups that communicated
via electronic chat rooms, calling themselves names such as
'the players' and 'the 3 musketeers', with the mantra: 'We all
die together'.

Spotlight shifts to FX options

In addition, the FCA found that staff in the bank's FX
option business had the 'opportunity' to engage in attempts to
manipulate fix or spot rates to benefit its trading positions
in currency options, but to the potential detriment of its
clients.

Certain forex options, including barriers and digitals, are
binary, meaning that they either pay out sometimes substantial
amounts or nothing at all, depending on the underlying spot
rate of the currency pair that underpins the option.

This creates a temptation for buyers and sellers of these
options to manipulate the spot market to ensure the spot rate
moves in their favour.

The enforcement action reads: "Barclays’
control failings also meant that traders had the opportunity to
benefit Barclays’ trading positions in FX options
by attempting to manipulate fix or spot FX market rates to
prevent Barclays’ clients from receiving pay-outs
from the options they had purchased from Barclays."

Barclays conducted a risk assessment in 2013 of three
foreign exchange businesses: EMEA G10 FX spot; G10 FX options;
and EM FX. It identified a lack of formalised monitoring and
surveillance, noting the risk with large FX barrier option
trades "where derivative traders may seek to inappropriately
influence spot traders to manipulate pricing in order to
benefit options settlements".

The FCA enforcement action against Barclays is different to
the other enforcement actions last year, in that the systems
and controls failings published in November applied to a
narrower scope.

US hardline approach

US regulators have also flexed their muscles, meting out
fines for FX manipulation to Barclays, Citigroup, JP Morgan
Chase, Royal Bank of Scotland, Bank of America and UBS. The US
Commodity Futures Trading Commission (CFTC), the New York State
Department of Financial Services (DFS), the US Department of
Justice (DoJ) and the Board of Governors of the Federal Reserve
System announced the fines on Wednesday, highlighting that
multiple regulators are taking the banks to task.

"The criminality occurred on a massive scale," says Andrew
McCabe, assistant director at the Federal Bureau of
Investigation. "Traders at the banks communicated in code in
chat rooms to set price-fixing on a daily basis."

The DFS pinpointed traders using phrases such as: "If you
ain't cheating, you ain't trying" to rig currency
benchmarks.

HSBC and Deutsche Bank are still being investigated by US
regulatory bodies, including the DoJ and the DFS.

In addition, Barclays agreed with the CFTC to pay $115
million to settle claims it attempted to manipulate the US
dollar ISDAfix benchmark. Meanwhile, UBS pleaded guilty to one
count of wire fraud for its conduct in manipulating Libor,
resulting in a $203 million fine.

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